Government cuts drag down U.S. economy

That’s the conclusion to draw from the new report on gross domestic product. The U.S. economy grew at a 2.5 percent annual rate in the first three months of the year, which was an improvement from the weak 0.4 percent of the final months of 2012. But Friday’s report was nearly a percentage point below analysts’ expectations, and for the last six months, number averages to only a 1.45 percent annual rate of growth.

The report should scratch any thought that our economy is heading into “escape velocity” and breaking into a higher, self-reinforcing trajectory of growth. That had appeared to be the case in the first couple of months of the year. But it just isn’t so. We’re muddling along at basically the same pace we’ve been at for nearly four straight years of this dismal recovery, with growth too slow to make up the lost economic ground from the 2008-2009 recession.

The report details this stuck-in-neutral economy. It’s not without bright spots, but there aren’t enough of them, and they aren’t bright enough to make up for the forces dragging the recovery, most significantly a drop in government spending.

The biggest culprit in the weak report was the government sector, which fell at a 4.1 percent rate, after a 7 percent pace of decline in the fourth quarter. The fall was universal — at the federal, state and local levels. The U.S. government is in pullback mode, and whatever one thinks about reducing the size government in the long run, for now it is unequivocally the villain in slowing growth. If there’d been no change in government spending over the last six months, GDP growth would have averaged a respectable 2.55 percent, not the current soft 1.45 percent.

There’s also little sign that the private sector is expanding aggressively to make up the difference. Business investment in structures (think factories and office building) fell in the first quarter, while spending on equipment and software rose at a 3 percent annual rate, far below the double-digit pace that was common earlier in the recovery.

The best news in from the report is that Americans spent more these first three months of the year. Personal spending rose at a 3.2 percent annual rate, the strongest since the end of 2010, with particularly good showings in durable goods (such as cars and furniture) and services (everything from restaurant meals to health care). That spending could go down in future quarters, as Americans see their paychecks shrink under the higher payroll taxes. But for now, consumers aren’t the problem.

Housing, on the other hand, which many have hoped will be the big driver of growth in 2013, is expanding, but not fast enough. Residential investment rose at a 12.6 percent rate in the first quarter, but that is coming off a very low starting point, and is slower than the 17.6 percent growth rate of the fourth. This housing “boom” added only 0.3 percentage points to the overall rate of GDP growth. The improvement is welcome, but builders need to work more than they did in the first quarter of 2013.

Many see these first months of 2013 as a face-off between a government that’s retrenching and a housing sector that’s expanding. In the first quarter, government unequivocally took dominance, subtracting 0.8 percentage points from growth, as housing added only a 0.3 percentage point.

So, there you have it. Economics writers are always looking for signs of change, and we excitedly (sometimes too eagerly) leap to identify a new trend in the economy. But this time there isn’t one. Government is contracting, as it has in 10 of the last 11 quarters. The private sector is improving quickly enough to counteract that contraction and ensure that GDP growth is expanding – but not fast enough to spur the robust recovery that the country sorely needs.

Neil Irwin writes the Econ Agenda column for The Washington Post and is the economics editor of Wonkblog, The Post’s site for policy news and analysis.